#BoFLIVE: Taking Stock of the M&A Market
May 20, 2020 | By: Lauren Sherman
What does the economic fallout of Covid-19 mean for acquisition targets and buyers in the year ahead?
NEW YORK, United States — With valuations shrinking and once fiercely independent brands reconsidering their positions, investors and strategic groups are beginning to plot acquisition strategies that reflect the realities of doing business in the age of Covid-19. But which companies are the best targets, and which categories are the best bets?
To answer this question, BoF Executive Editor Lauren Sherman spoke with Elsa Berry, managing director and founder of Vendôme Global Partners; Ariel Ohana, co-managing partner, Ohana & Co; Pierre Mallevays, managing partner of Savigny Partners LLP; and Luca Solca, head of luxury goods research at Bernstein, in a live event presented by Afterpay, available exclusively to BoF Professional members.
“Right now there’s a real dichotomy,” said Berry. “I think those that are jumping in are… primarily driven by distress [sales] and low valuations, but I'm positive... that the big luxury players are right now mapping out their strategies and will resume M&A if they haven’t already.” The big question, she added, is over valuation of non-distress deals. “There will be a valuation gap, and ways to surmount that.”
Certain factors, such as a strong brand awareness in China and a digital presence, have become increasingly important as brick-and-mortar retail takes a hit, but consumer trends in the midst of a recession will also inform which brands are desirable M&A targets. “Consumers are becoming more conservative overall [and] probably shifting towards iconic products,” said Solca, who also agreed with Berry’s prediction that jewellery and timepieces could show a quicker rebound than other luxury categories owing to their lack of seasonality and the enduring value of precious metals.
However, the widespread economic fallout of Covid-19 means that not only acquisition targets are affected but traditional buyers too, meaning we could see the emergence of high net worth individuals and family offices showing interest in the sector. Deals could also lean more towards a partnership mentality, where investors take a strong minority stake and take over distribution or operations in a specific region, such as China, and the company in turn benefits from a healthy cash injection, noted Mallevays. In that vein, added Berry, investors will be hesitant to drive down the price of a bargain acquisition at the risk of decimating the company’s valuation.